Currency wars

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Currency wars

Speaking in Tokyo, the former governor of the Bank of England, Mervyn King, said that he fears central banks may end up in currency wars as a way to devalue their currency and divert what global demand there is towards their products and services, which become cheaper with a weaker currency. Sir Mervyn believes that this could be resorted to as every major central bank has now run out of monetary policy arrows, with interest rates at or around zero and vast sums of money having been printed.

Sir King’s statement is obviously not true about the Swiss as they removed the cap over the value of Swiss Franc versus the Euro. The Swiss National Bank seeks to regain independence from another potential round of monetary easing by the ECB and that is why they provoked extreme volatility in the financial markets on January 15th.

One of the much-awaited events on this week’s schedule is the FOMC interest rate statement, as forex traders are eager to find out what the chances are of seeing Fed tightening sometime this year. The risks involved in the US economy might lead Fed officials to stick to their cautious stance in their upcoming policy decision. Their actual statement is still likely to contain the dovish “considerable time” phrase, which could be balanced out by slightly hawkish comments on being “patient” with potential adjustments. In this case, the U.S. dollar might still be able to stay strong against its forex counterparts, as most economies have been faring worse and other central banks have opted to ease monetary policy.

Mr. British Pound Moves

In today’s London session, investors in the UK brushed off a worse than expected reading of fourth quarter GDP yesterday, despite some worrying signs in the data that the recovery is slowing down quite unevenly. Once again the services sector in the UK propped up the rest of the economy, which saw construction contract quite significantly and manufacturing stay pretty static. The headline number of 0.5% in Q4 meant in 2014 we grew by 2.6% overall.

However Mr. British Pound stayed out for most of the session as investors didn’t seem to be too concerned about that data. Later in the session he even benefitted from some worse than expected US data, as did the Euro, which also benefitted from the Swiss national bank reiterating that they were prepared to continue to intervene in the markets, despite lifting their currency cap.

In fact putting UK growth into consideration, and add improvements in the UK employment and  consumer spending, overall it seems that all is well for the UK so far. But it comes down to whether or not the economy can stay ahead of the other struggling countries and sustain recovery.

Even with falling inflation and GDP, spending and growth stayed resilient for now while hiring improvements suggest that further progress can be made.

Who do you think will be the winner of a potential currency war? Com’on over to our Facebook page and let us know.